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Strategy, previously known as MicroStrategy, is contemplating a shift that could fundamentally change the risk profile of the world’s largest corporate Bitcoin treasury.
For ten years, the company convinced Wall Street of a singular narrative: it served as a digital vault, providing unrestricted access to Bitcoin while avoiding the risks associated with custody or counterparty issues. This position is evolving as the company now considers entering the crypto lending sector.
On December 2, Strategy CEO Phong Le informed Bloomberg that the firm was in discussions with banks about lending out its assets. However, he emphasized that they were awaiting significant financial players to engage in the sector before deciding.
He stated:
“We’ve had numerous productive discussions. They have mostly been: we are thinking about offering Bitcoin services—custody, exchange, lending, etc. You are the largest corporate holder of Bitcoin globally; what advice can you give us, and should we collaborate?”
While this shift is presented as a maturation of the business, it exposes the company to re-hypothecation risks that contradict the “cold storage” philosophy that established its $55 billion reserve.
Nevertheless, this pivot indicates that Strategy is transitioning from a passive holding entity to an active credit desk.
This transition is fueled by the need to validate its valuation premium in a market where spot ETFs have commodified Bitcoin access.
The yield trap
Strategy currently maintains 650,000 BTC. Traditionally, this stockpile has remained dormant in the firm’s coffers.
Lending it out could generate income. However, it raises a paradox, as the primary institutional demand for borrowing Bitcoin originates from market makers and hedge funds wanting to short the asset.
To grasp the risk, one must examine the mechanics of the trade.
In the institutional landscape, the demand for borrowing Bitcoin is seldom for holding; it is almost exclusively for selling to hedge derivative exposure.
By introducing its substantial reserves into the lending market, Strategy would effectively reduce the “cost to borrow,” a critical friction that generally deters short sellers.
As a result, Strategy would be providing the inventory used to speculate against the price appreciation of its own reserves by establishing a lending desk.
Moreover, this move introduces counterparty risk to a balance sheet that was previously characterized by its simplicity.
Notably, the crypto credit market experienced a disastrous collapse in 2022 after lenders like BlockFi and Celsius miscalculated the risks of lending to opaque borrowers.
While Le assures that Strategy will collaborate only with top-tier banks, the essential premise remains that Bitcoin will leave its vault.
Thus, in the case of a banking failure or a credit seizure, Strategy would shift from being an asset owner to an unsecured creditor.
Defending the premium
Meanwhile, Strategy’s quest for yield seems linked to its declining stock valuation.
The firm’s model depends on trading at a premium to its Net Asset Value (NAV), allowing it to issue equity at inflated prices to acquire more Bitcoin. That premium, which once reached 2.5x, has diminished. As of December 3, Strategy’s multiple to NAV (mNAV) stood at 1.15.
In a frank admission, the firm recently acknowledged that it would contemplate selling Bitcoin if the mNAV drops below 1.
This sets up a potential “reflexivity loop” in the market: if Strategy’s share price falters, the company could be compelled to liquidate Bitcoin, which would drive down spot prices further, exacerbating the share price decline.
To avert this, the Michael Saylor-led firm must provide investors something that ETFs cannot: yield.
Furthermore, the company recently raised $1.44 billion in equity to fulfill dividend obligations on its preferred shares, highlighting the cash-flow strain of sustaining its current capital structure.
A crowded trade
If Strategy enters the lending space, it encounters a market vastly different from the uncollateralized “Wild West” of 2021.
According to Galaxy Digital, stablecoin issuer Tether currently dominates centralized lending with a $14.6 billion book.
However, Tether lends stablecoins (USDT), creating leverage for buyers. In contrast, Strategy would be lending Bitcoin, increasing supply for borrowers.
The vast size of Strategy’s 650,000 BTC reserve considerably overshadows the collateral pools of competitors like Nexo and Galaxy and could potentially distort the market. If even a small portion of that supply enters the lending desks, the cost to borrow Bitcoin could plummet, significantly lowering yields across the sector.
Essentially, Strategy is wagering that it can evolve from a passive entity into a sophisticated financial player. However, in doing so, it risks replacing the transparency associated with “digital gold” for the opacity of structured credit.
For investors who purchased Strategy as a proxy for pristine collateral, the vault door is starting to appear alarmingly ajar.
